Guidance Document n°7 on New Entrants and Closures – important clues on the definition of ‘physical change’ made in the installation in the context of free allocation of carbon credits

Monday, 03 October 2011 05:29

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The long-awaited Guidance Document n°7 issued in September specifies which technical modifications constitute ‘physical change’ in the EU ETS installation and which do not. The additional or reduced allocation of emission allowances valid in the third trading period obviously is at stake.

The long-awaited Guidance Document n°7 on the harmonized free allocation methodology for the EU-ETS post 2012 Guidance on New Entrants and Closures (Final version) has been issued on 14 September 2011. Those interested in the issue should refer to the webpage http://ec.europa.eu/clima/documentation/ets/benchmarking_en.htm for the full text of this important document.

It is evident that the significance of the document concerned will extend throughout the entire third trading period i.e. till 2020. Furthermore, given the fact, the statutory definition of ‘new entrant’ covers the period since 30 June 2011, the Guidance Document n°7 should be the subject of particular, urgent consideration of every EU ETS installation’s operator. It is likely it would be necessary to return to the detailed analysis contained in the Guidance Document n°7 not once but in this place let’s start with elaborations thereof on the definition and practical examples of a ‘physical change’ made to the installation and its correlations with the extent of free allocation of carbon credits valid in the third trading period.

As the Guidance Document explains, in the context of the definition of significant capacity extensions/reductions, such physical changes must be understood as modifications of production processes and the equipment required, and the different subparts of the definition should be interpreted as:

Article 3 points (i) and (j) of the Commission’s Decision determining transitional Union-wide rules for the harmonised free allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC of 27 April 2011:

'significant capacity extension' means a significant increase in a sub-installation's initial installed capacity whereby all of the following occur:

(i) one or more identifiable physical changes relating to its technical configuration and functioning other than the mere replacement of an existing production line take place, and

(ii) the sub-installation can be operated at a capacity that is at least 10% higher compared to the initial installed capacity of the sub-installation before the change, or

(iii) the sub-installation to which the physical changes relate has a significantly higher activity level resulting in an additional allocation of emission allowances of more than 50000 allowances per year representing at least 5% of the preliminary annual number of emission allowances allocated free of charge for this sub-installation before the change.

(j) 'significant capacity reduction' means one or more identifiable physical changes leading to a significant decrease in a sub-installation's initial installed capacity and its activity level of the magnitude considered to constitute a significant capacity extension

1. The necessary condition is the physical nature of the change related to the technical configuration and functioning. This excludes all types of merely organizational or operational changes (e.g. longer daily operation hours, higher speed of rotating kiln, application of new process control software, change in major process parameters such as pressure, temperature).

2. The impact of the physical change on the technical configuration and functioning constitutes the sufficient condition. Any physical change without such impact (e.g. a repaint coating of the outer face of a kiln) does not match the definition as there needs to be a clear causality link between the physical change(s) and the change in capacity. In other words, only physical changes allowing for changes in throughputs could lead to a significant change of capacity.

3. Furthermore, the mere replacement of an existing production line cannot be considered in the context of the definition of significant capacity extensions. This includes the replacement of parts of a production line without impacts on the technical configuration and functioning (e.g. replacement of a pre-heater with the same performance). But, in case of higher maximum throughput of the production line after the replacement, this change could in principle constitute a physical change leading a significant capacity extension (provided the